I have asked dozens of financial planners where they add value to their clients. Their usual response is, through advice and strategy.
Ask these same financial planners what they cover in their review processes, and most continue to focus on the investments, including fund manager monitoring, selection and recommended changes, blending, economic updates and so forth, clearly focusing on where the added value is not.
Why do so many financial planners continue down this path? Is it that they are scared of change? Is it that they do not have the systems in place to provide the added value through advice and strategy? Perhaps some feel that value is added in the investment process.
My view is that far too many planners are trying to reinvent the wheel. I came to the conclusion back in 1999 that financial planning should be all about advising clients on how to achieve lifestyle goals, not “fund picking” for them, so I began the transformation of my firm, Haintz Financial Services, based in Melbourne, Australia, a dedicated financial planning business.
In 2000, I transferred all of our clients' funds out of discretionary funds and into non-discretionary multi-manager options through National Australia Bank's MLC business. In doing so, I not only outsourced all the investment decisions to people more qualified to do the job but also saved 30 to 50 basis points compared with discretionary options.
As a result of these considerable changes and the hard work of my team, in June this year, our business came first in the Australian IFA Best Practice of the Year Awards 2004. Looking at the industry in the UK, I recognise many of the issues that we faced in the Australian market 10 years ago. Can the Australian model offer any assistance to UK IFAs, leading their firms through this period of considerable change?
Original thought in routine situations is inefficient and exhausting. That is the view of Paul Etheridge, a pioneer of the financial planning industry in the UK. The point that Etheridge makes is that many planners still tend to think of themselves primarily as technicians and try to reinvent or fix the wheel when it is not broken.
By contrast, a planner who follows Etheridge's logic and takes a more entrepreneurial view – focusing on how to maximise business value – would be more likely to use the wheel that has already been invented so long as it delivered the result required.
Entrepreneurs recognise opportunity cost and know that time spent reinventing products or processes could be much better spent on things that deliver greater value to the business.
This simple business concept – efficient allocation of time and resources – is true for all industries. The time that financial planners spend researching, constructing, implementing, maintaining and communicating unique portfolios could be much better spent.
This is especially true when you recognise you could outsource complete portfolio construction to an expert research team, and access a range of efficiently engineered, fully implemented and fully maintained client portfolios.
Take this test. Make a list of all the investment holdings you have accumulated across your entire client base. Remember, you may end up with numerous different products and portfolios from any one fund manager over time. If you have been in the game for 10 years or more and you use traditional retail and discretionary systems across a sizeable client base, you will struggle to stay under 100 different holdings.
How many different client portfolios do you need? I believe it should be between two and 10. In reality, it is probably somewhere in the middle, with the majority of clients fitting nicely into a balanced or growth portfolio.
But do your clients with the same risk/return profile hold the same port-folio? Does your 1994 growth client hold the same basket of assets and managers as the growth client you met last month?
If you are using traditional retail and discretionary portfolio implementation systems, then the answer is probably no.
The irony of this situation is that in many cases, the portfolio and planning outcomes for the client could be improved if the portfolios were outsourced to specialists who engineer and re-engineer portfolios all day, every day.
Of course, outsourcing portfolio management is not appropriate for every client. My experience suggests that 75 per cent of clients are comfortable with delegating investment decisions.In deciding if you should make the change, ask yourself some tough questions:
Is the traditional retail or discretionary approach to portfolio implementation and management is holding you back?
What is the cost of this complexity and reduced capacity to the value of your business? Are customised portfolios (or even standardised portfolios not systematically implemented and maintained) creating downstream maintenance hassles inhibiting the growth or saleability of your business?
Would outsourcing the construction of portfolios allow you to take a more direct role in communicating the details and benefits of your clients' portfolios, tracking portfolio progress against benchmarks, sending out stock stories or insights into the asset mix and manager combinations to inspire greater client confidence and loyalty?
Would outsourcing portfolios let you build more profitable and sustainable ongoing relationships with your clients, filling the roles of coach, financial planner and manager?
Would you have more time to help your clients set financial and lifestyle goals, and to help motivate and discipline them to achieve those goals?
Increasingly, savvy IFAs in the UK are coming to understand that portfolio construction is best left to experienced constructors and financial planning is for planners. There is no need to reinvent the wheel – it works. Availability of platforms for IFAs to achieve this are becoming increasingly available in the UK. What I feel sure of is that the potential this offers to transform your business is profound by outsourcing portfolio implementation and management.